When it comes to energy stocks, a company must be able to generate solid profits in the long run based on a sound operational strategy. Past performance may give you good insight into this ability, but you still need to make sure the company can grow and generate healthy future cash flows in the future. Considering these factors, I wanted to take a special look at Los Angeles-based Occidental Petroleum (NYSE: OXY ) .
About a month ago, I analyzed Occidental’s first quarter results, which were pretty impressive. Alhough no metric can capture the complete essence of a company's operational efficiency, I believe EBITDA comes close, and Occidental's five-year compounded EBITDA annual growth rate stands at 6.3%. That's not exactly mind-blowing, considering what I think this company is capable of, but it's not bad, either.
On the fundamentals side, total production from continuing operations rose by 5% in 2010. Cash flows from operations have gone up gradually over the past five years, too. However, some of the components of that cash flow look somewhat dubious, with 28.8% of operating cash flows coming from items such as changes in accounts payable, other operating activities, changes in income taxes, and asset sales, instead of from core operations. Investors should definitely dig deeper and check the filings for a better grasp of the numbers here.
Investors need to check into the company's ability to generate future profits. How good are the company's oil and gas reserves? The current value of estimated future cash inflows from proven reserves, less future development and production costs, discounted at 10% per annum, stood at $34.4 billion as of last Dec. 31. That's a 38% rise over the previous year's value, but it comes primarily from a rise in oil and gas prices, rather than from extensions, discoveries, or improved recovery. So, don't get fooled on this front.
How expensive is Occidental when compared against future cash flows? The total enterprise value-to-discounted future cash flows figure is 2.56. For Exxon Mobil (NYSE: XOM ) the value stands at 2.51, Chevron's (NYSE: CVX ) stands at 1.79, and ConocoPhillips' (NYSE: COP ) , is 2.33. Compared with even the highest quality of integrated oil companies, Occidental still looks expensive.
Current valuations don't look any better. A P/E of at 18.63 makes Occidental more expensive than Exxon at 13.53, Chevron at 11.34, and ConocoPhillips at 10.48. Investors aren't getting much of a deal with this stock right now.
Foolish bottom line
Unless the company scales up production in a big way, its peers will continue to have an edge. Higher oil prices will definitely boost its earnings, but it wouldn't be wise for Occidental to depend only on macroeconomic conditions to achieve profits. I'd stay away from this stock for now, especially since you can get much better deals elsewhere.